Investment property held directly by individuals can considerably increase the estate for inheritance tax. If the property has been held for a while there are likely to be inherent capital gains making it difficult to give away without a large capital gains tax charge.
Consider carving out a leasehold interest in the property that begins at some point in the future (within 21 years) and gifting this away. Delaying the start date of the lease significantly reduces its value. Where the value of the deferred lease is less than £325,000, hold over relief for capital gains tax will be available if the lease is given to a trust. If the value of the leasehold interest exceeds the inheritance tax nil rate band of £325,000, it may instead need to be given directly to a family member to avoid the 20% lifetime inheritance tax charge. Capital gains tax may arise but on a much lower value than a gift of the whole property.
Tax Bites are a fortnightly article featuring simple updates about key tax opportunities for other professional colleagues and clients. For further details, contact the author or your usual Forbes Dawson contact via our ‘Contact Us’ page.
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